The Importance of the Settlement Statement in a 1031 Exchange

In a 1031 exchange, the settlement statement should document all the details of your particular exchange. Have the parties sign it and ratify their approval and, most importantly, spell everything out so that it’s clear as day. Make the accountant’s job easy by itemizing in great detail. When possible, have the taxpayer bring in cash from their own pocket to cover operational expenses (such as prorated rents and security deposits).

That’s an ideal 1031 exchange scenario. But the reality is that some taxpayers conducting 1031 exchanges are cash poor. It’s easy for these taxpayers to have selective amnesia when they get their tax bill and realize that they are going to be taxed on the security deposits and other expenses that they pocketed. It’s important to understand that siphoning off your exchange funds to pay non-qualified expenses can trigger some gain.

A savvy CPA or tax attorney may recommend that you reinvest all of your equity and do a super clean 1031 exchange. Later, in a subsequent transaction, the taxpayer may refinance the replacement property to access their equity post-exchange. When you borrow money and you have a corresponding obligation to repay that loan, it’s not taxable income. So you can get your hands on the same amount of cash if you’re patient and you delay your gratification.

1031 Exchange Services in Minnesota & Beyond

CPEC1031, LLC offers 1031 exchange services throughout Minnesota, as well as the entire United States. If you are a US taxpayer looking to defer your capital gains taxes on the sale of investment real estate, a like-kind exchange may be the best course of action for you. Reach out to the qualified intermediaries at CPEC1031, LLC today at our offices in downtown Minneapolis to learn more about the like-kind exchange process and see how we can help you through the specifics of your next exchange of real estate.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

What is the G(6) Limitation in 1031 Exchanges?

In a 1031 exchange, the intermediary is treated as qualified intermediary of the transaction if the exchange agreement contains the G(6) limitation. The G(6) limitation basically states that the taxpayer conducting the exchange can’t receive, pledge, borrow, or otherwise get the benefits of the 1031 exchange funds.

That exchange agreement is voided the moment that the G(6) limitation ceases to apply. You don’t want to have an agreement and then not follow it. That would be contrary to the requirement that you have to continue to keep a wall up that prevents the taxpayer from receiving any of the 1031 exchange funds. You must adhere to the terms of your original exchange agreement to make the exchange work.

1031 Exchange Accommodators

CPEC1031, LLC provides 1031 exchange accommodation services to clients throughout the United States. Want to learn more about saving money in capital gains taxes when selling investment real estate? Give our qualified intermediaries a call today! We have over twenty years of experience working in the like-kind exchange industry and can help you navigate the ins and outs of a 1031 exchange. Contact us today for more information about the 1031 exchange process, the benefits of section 1031, and how you can begin the process of deferring capital gains taxes on the sale of real property.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

What You Can Pay with 1031 Exchange Funds

Here is a list of the items that are probably OK to pay using 1031 exchange funds as long as they relate to the specific exchange transaction:

• Broker Commissions

• Finder and Referral Fees

• Title Insurance Premiums (for owner’s title insurance specifically)

• Closing Agent Fees

• Tax Advisor and Financial Planner Fees

• Recording and Filing Fees

• State Deed Tax and Transfer Charges

• Attorney Fees Related to the Specific 1031 Exchange Transaction

It’s important to remember that these expenses are only OK to pay using 1031 funds insofar as they are related to the 1031 exchange itself. For example, fees from your attorney for working specifically on the 1031 exchange would be appropriate, but any additional attorney fees (for estate planning, for example) would not be appropriate.

You can also choose to pay all of these transactional fees out of pocket and keep your 1031 exchange funds completely separate. That would be the safest, most conservative course of action.

Deferring Taxable Gain with a 1031 Exchange

Defer your taxable gain when you sell investment real estate by conducting a 1031 exchange! Interested in learning more about the 1031 exchange process and whether your property is a good fit? Contact the qualified intermediaries at CPEC1031, LLC today. We have been helping taxpayers with their 1031 exchanges of real estate for more than twenty years. Our experience in the 1031 exchange industry makes us well suited to assist you with your next real estate exchange. Reach out to us today to set up a time to chat about your exchange!

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

Options for Covering Non-Qualified Expenses in a 1031 Exchange

In a 1031 exchange, you may find that you have some boot items on the settlement statement that you clearly don’t want to pay for out of the 1031 proceeds. In this situation, the first thing you want to look at is whether you have some of your own money in the transaction that you can apply toward these items. For example, if there was an earnest money deposit that you paid for the replacement property, you could earmark a portion or all of that deposit to pay for the boot items.

Additionally, you may be getting some credits from the other side. Maybe the seller has agreed to give you a concession of some kind. You could apply that credit from the other side to pay for boot items.

Lastly, you can choose to pay for these boot items with outside money. Send in your 1031 exchange funds from the intermediary to pay for the exchange, and then send in non-1031 exchange funds out of your own pocket to pay for the boot items.

However you approach this, it’s important to inform the closing agent so they can properly notate the settlement statement.

Like-Kind Exchanges of Real Property

Like-kind exchanges of real property offer tax-saving benefits that are available to all US taxpayers. When you sell a property in a 1031 exchange, you reinvest all of your net proceeds from the sale into a new replacement property. This allows you to continue your investment while deferring your capital gains taxes from the sale of the relinquished property. Contact the intermediaries at CPEC1031, LLC to learn more about how you can save money with a 1031 exchange. Our team has more than twenty years of experience facilitating exchanges under section 1031 of the IRC.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Exchange Fictions

The current 1031 exchange treasury regulations that were issued in 1991 are designed so that the taxpayer is not considered to be in receipt of the sales proceeds. The fiction is that the intermediary insulates the taxpayer from receiving anything but like-kind property (assuming the exchange is done correctly). The intermediary holds the money, but that holding of the money has to be pursuant to a written exchange agreement signed by the taxpayer and the intermediary. That exchange agreement has to contain limitations (sometimes referred to as the G(6) limitations), which are the modern iteration of the idea that you can’t get your hands on the 1031 exchange funds while they’re being held by the intermediary.

Direct Deeding

Another 1031 exchange fiction is the “direct deeding” fiction. Back in the old days (pre-1991), if the qualified intermediary was the seller of the relinquished property, you may have deeded your relinquished property to your intermediary acting as your escrow agent and the escrow agent would have sold the relinquished property directly to the buyer by deed. That extra deeding was unnecessary and burdensome, so in the 1991 regulations they came out with the idea of direct deeding wherein there would simply be a deed from the taxpayer conveying the relinquished property to the buyer, but there will have been an assignment to the intermediary of the seller’s rights in the relinquished property sale. That assignment wasn’t considered effective unless there was written notice given to the other parties involved.

So when we say we want to correctly identify the names of the parties on the settlement statement, that’s all in an effort to fully comply with the treasury regulations.

CPEC1031, LLC – Qualified Intermediaries

When you’re doing a 1031 exchange, you want to have a like-kind exchange professional by your side to guide your decision making. CPEC1031, LLC focuses solely on 1031 exchanges of investment real estate. Our qualified intermediaries are ready to help you through all the specific details of your next 1031 exchange of real estate. Contact our team today to learn more about the like-kind exchange process, its benefits, and to see if your property qualifies for like-kind exchange tax deferral.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2024 Copyright Jeffrey R. Peterson All Rights Reserved